The Centre plans to make India a $1 trillion digital economy by 2025, which will attract countries wanting to set up data centres in India.

In her budget speech earlier this year, Finance Minister Nirmala Sitharaman proposed to allocate Rs 8,000 crore to set up data centres and IT parks, over the next five years. Her announcement came on the back of the Personal Data Protection Bill, 2019, which stipulates that an individual’s critical and sensitive personal data must be stored in India.

A data centre is a facility which stores large volumes of digital information and the modern digital economy functions around them. But the conversations around privacy, different categories of data and data localisation have put them under the spotlight. In India, the data centre ecosystem is still in its infancy. However, the government of India has an ambitious plan to make the country a $1 trillion digital economy by 2025. Consequently, companies may find it appealing to set up data centres in India.

On the surface, the Finance Minister’s announcement, the government’s ambition and legislative support may sound like an inviting proposition. But a closer analysis of India’s regulatory and internet infrastructure illustrates that the country requires calibrated policy measures to ensure it becomes a regional data hub.

Hurdles for data centres

In 2017, India ranked 134 out of 176 countries on the ICT development index, a measure developed by the UN’s International Telecommunication Union, to determine a country’s digital development. Poor network infrastructure quality, aided by restrictive rules and laws, is the principle reason responsible for this dismal performance of India.

For instance, data centres may use dark fibre to overcome degraded network performance. Though expensive, these avoid latency, provide greater bandwidth, stability and security. However, dark fibre network is considered as telecom infrastructure and can only be accessed through a licensed partner. Consequently, companies who want to operate data centres are forced to enter into commercial agreements with telecom service providers, even though the service they provide is non-telecommunication connectivity. Relaxing such requirements for data centers will attract more investments and promote competition in this segment.

Lack of encryption standards which are essential to prevent breaches, especially if data is stored in one location, is another hurdle. An encryption standard ranging from 128 bits to 256 bits or more can ensure the security of sensitive information, exchanged via the Internet. Indian laws mandate varying levels of encryption. In the past, The Department of Telecom (DoT), had, prescribed weak encryption standards of 40-bits for Internet Service Providers (ISPs) and encryption above this requires specific permission. But, banking transactions need to be secured with 128-bit encryption, at the very minimum. For data to be secure, these standards will have to be strengthened across sectors.

Another hurdle is a restrictive company — National Internet Exchange of India (NIXI). It allows ISPs to interconnect via exchanges in India. If the NIXI was opened up, it would lead to cost-effective data transmission between customers and enterprises. Its connection with domestic data centers, ISPs and content providers, will enable efficient traffic routing. For that to happen, data centres need to be recognised as key components of a core internet network. The London Internet Exchange (LINX) and the Amsterdam Internet Exchange (AMS-IX) allow private peering — a direct connection — between data centres and enterprises. As a result, data transfers are quicker and cost-effective.

Incentives for companies

Around the world, governments give several incentives to companies to help them set up data centres.

In the US, several state governments offer low property and sales tax rates on power infrastructure, equipment and electricity to attract data centres, subject to certain investment and employment thresholds. In Florida, for example, data centres fall under the Florida Enterprise Zone incentives programme which has a qualified target industry tax refund incentive. Under the scheme, companies that create high wage jobs in the state are eligible for tax reimbursements on their corporate incomes, sales, intangible personal property and insurance premiums. In 2017, Sweden slashed the tax rate on electricity used by data centres, by 97 per cent.

Other incentives include capacity development and infrastructure support. To develop the country’s data hub in Guizhou, the Chinese government encourages tertiary institutions to offer courses in big data. Singapore’s data centre parks provide power related infrastructural facilities like on-site power plants, dual power feeds and redundant sources of network path diversity.

Policy in India

Some companies in India have been quick to recognise the importance of data centres. CtrlS, a Hyderabad-based company, was the first to set up a tier-IV data centre that is available 99.95 per cent times of the year, with the most advanced facilities. Another company, STT Global Data Centres India Pvt. Ltd — a joint venture between Tata Communications and Singapore’s STT India DC Pte. Ltd —operates 15 data centres in major cities including Pune, Hyderabad, Delhi and Mumbai.

Some state governments too have recognised their importance. Maharashtra provides incentives like stamp duty exemption, VAT refund and an electricity duty exemption to companies that invest a minimum of Rs 1,500 crore to set up a data centre, according to its 2015 IT policy.

Telangana’s 2016 data centre policy offers sales tax and building fee rebates, as well as land at subsidised costs. Gujarat too offers subsidies on power tariffs and lease rentals. But restrictive labour laws in these states, blunt these incentives and act as hurdles in the path of data centres.

In 2008, the Maharashtra government made it mandatory for all industrial enterprises to ensure that 50 per cent of their supervisory stuff and 80 per cent of all employees are locals. In 2019, the Shiv Sena-led government said that it would enact a law to ensure 80 per cent of all private sector jobs are reserved for “sons of the soil”. Gujarat too is trying to implement a similar law.

In India, it is critical to have a robust telecom sector and the ability to leverage new technologies like 5G for smooth functioning of data centres. Regulatory and labour laws in the country need to change. India needs a national policy that provides clarity on licencing, harmonises standards, provides incentives, improves infrastructure and promotes the flow of data. The finance minister’s Budget 2020 provisions for data centres is the springboard for such a policy.

The authors work at Koan Advisory Group, a technology policy consulting firm. This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector.